Budget and Budgetary Conrol

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INTRODUCTION&

OBJECTIVES OF STUDY

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INTRODUCTION TO BUDGET AND BUDGETARY CONROL

BUDGET:

Budget is essential in every walk of our life national, domestic and Business. Abudget is prepared to have effective utilization of funds and for the realization of objective

as efficiently as possible. Budgeting is a powerful tool to the management for performing

its functions i.e., formulation plans, coordination activities and controlling operations etc.,

efficiently. For efficient and effective management planning and control are tow highly

essential functions. Budget and budgetary control provide a set of basic techniques for

planning and control.

A budget fixes a target in terms of rupees or quantities against which the actual

performance is measured. A budget is closely related to both the management function as

well as the accounting function of an organization.

As the size of the organization increases, the need for budgeting is correspondingly

more because a budget is an effective tool of planning and control. Budget is helpful in

coordinating the various activities (such as production, sales, purchase etc) of the

organization with result that all the activities precede according to the objective. Budgets

are means of communication. Ideas of the top management are given the practical shape.

As the activities of various department heads are coordinated at the much needed for the

very success of an organization. Budget is necessary to future to motivate the staff

associated, to coordinate the activities of different departments and to control the

performance of various persons operating at different levels.

Budgets may be divided into two basic classes. Capital and operating budgets.

Capital budget are directed towards proposed expenditure for new projects and often

require special financing.

The operating budgets are directed towards achieving short-term operational goals

of the organization for instance, production or profit goals in a business firm. Operating

budgets may be sub-divided into various departmental of functional budgets.

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Definitions of Budget:

According to Institute of Charted Management Accountants, England A plan

quantified in monetary term prepared and approved prior to a defined period of time

usually showing planned income to be generated and / or to be incurred during that period

and the capital to be employed to attain a given objective.

According to ICMA, England, a budget is, a financial and/or quantitative

statement, prepared and approved prior to a defined period of time, of the policy to be

pursed during the period for the purpose of attaining a given objective.

It is also defined as, a blue print of projected plan of a action of a business for a

definite period of time.

BUDGETARY CONTROL:

No system of planning can be successful without having an effective and efficient

system of control. Budgeting is closely connected with control. The exercise of control in

the organization with the help of budgets is known as budgetary control. The process of

budgetary control includes.

1. Establishment of budget for each function and section of the organization.

2. Executive responsibility in order to perform the specific tasks so that objectives of

the enterprise may be attained.

3. Continues comparison of the actual performance with that of the budget and placingthe responsibility of executives for failure to achieve the desired result a given in

the budget.

4. Taking suitable remedial action to achieve the desired objective if there is a

variation of the actual performance from the budgeted performance.

5. Revision of budgets in the light of changed circumstances.

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Definitions of Budgetary Control:

According to the Brown and Howard Budgetary control is the system of

controlling costs which includes the preparation of Budgets, co-coordinating the

department and establishing the responsibilities, comparing the actual performance with the

budgeted and acing upon the results to achieve the maximum profitability

According to the J.Betty: A system which uses budgets as a means of planning

and controlling all aspects of producing and / or selling commodities and services

According to the CIMA, London, Budgetary control is the establishment ofbudgets relating to responsibilities of executives to the requirement of a policy, and the

continuous comparison of actual with budged results, either to secure by individual action

the objective of that policy or to provide a basis for revision.

OBJECTIVES OF STUDY:

1. To analyze the revenue budgets and budgetary control policies of LG

ELECTRONICS through the analysis of UPPAL through the analysis of financial

statements.

2. To study the revenue budgets as it serves as a mechanism through which his

objectives and policies are affected.

3. In the light of the findings can be offered for the improvement of its

budgetary control.

4. To give a suggestion for the better & successful budgetary control.

5. To organize data for the past five years, compare and study the trend

possible.

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STATEMENT OF PROBLEM

The importance of budgeting and budgetary control in the decision making, revenue

budget estimate of a business needs no emphasis. Therefore, an analysis of the budgeting

and budgetary control of a business firm is always a dynamic subject for research and

development. With this back drop a humble attempt is being made to analyze the

budgeting control of LG ELECTRONICS INDIA LTD.

METHODOLOGY:

In this case study. The budgeting control of the LG ELECTRONICS is analyzed in

this study. The required data has been collected from primary data and such as annual

reports were taken. And reasons for variances were analyzed. The variances between the

revised estimates and actuals were computed. And finally suggestions and conclusion.

Firstly, the revenue budget estimates for the past five years were taken.

Secondly, the variance between the revised estimates and actuals were computed.

Thirdly, the reasons for variances were analyzed and measures were taken. Graphs are

given regarding variances of sales, total cost of production, sales quantity and inventory,

and interpretation.

SCOPE OF THE STUDY:

Under this study the budgeting and budgetary control under study is done from the

angles of efficient controlling and corrective decisions and operational efficiency.

REFERENCE PERIOD:

The period of the study was done with reference to the past 6 years i.e. from 2002-2009.

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SOURCES OF DATA:

The main source of data is through primary sources and secondary sources of data.

Through annual reports, financial statements of the company and also secondary data from

different books and journals.

LIMITATIONS:

The analysis is only based on the information given in the financial statements of the

organization. The final accounts compared for the year 2006-06. Data is taken from internal

sources of the company only.

BUDGETARY CONTROL PRACTICES IN LG ELECTRONICS

Capital Budget

Revenue Budget

In LG ELECTRONICS budgets are prepared for the following periods

Revised estimates of current financial year

Budget estimates of next financial year

Forecast

Suppose, if we consider that the budget preparation activity of 2006-06, the budgets are

prepared for the following periods.

Revised estimates i.e. RE 2008-08

Budgets estimates i.e. BE 2009-09

Forecast i.e., 2010-10

Revised Estimate is nothing but the revision of budget estimate of previous year i.e. BE

2006-06 taking into consideration actual up to August Budget circular will be issued by the

Finance Department requesting all shop In charges\Departmental Heads to compile their

respective budgets and send to Finance Department within the stipulated period.

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BUDGET, BUDGETING AND BUDGETING CONTROL

Row land and William in their book entitled Budgeting for management control has

given the difference between budge, budgeting and budgetary control as follows:

Budgets are the individual objectives of a department etc where as budgeting may

be said to be the act of building budgets. Budgetary control embraces all this and in

addition includes the science of planning the budgets themselves and the utilization of such

budgets to effect on overall management tool for the business planning and control. Thus,

a budget is a financial plan and budgetary control results from the administration of the

financial plan.

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ORGANISATION PROFILE

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COMPANY PROFILE

About LG

Established in 1958, LG Electronics, Inc. (LG) is a global leaderand technology innovator in consumer electronics, home appliances andmobile communications, employing more than 82,000 people working inover 110 operations including 81 subsidiaries around the world.

Comprising four business units - Mobile Communications, DigitalAppliance, Digital Display and Digital Media with 2007 global sales of

USD 38.5 billion - LG is the world's leading producer of CDMA/GSMhandsets, air conditioners, front-loading washing machine, optical storageproducts, DVD players , flat pane l TVs and home thea ter systems .

Corporate Name LG Electronics Inc.

Established October 1, 1958 (As a private Company)

Corporate Office LG Twin Towers20, Yeouido-dong, Youngdungpo-gu, Seoul, Korea 150-721Tel: 82-2-3777-1114URL: http://www.LGE.com

Vice Chairman &

CEO

Yong Nam

Business Area and

Main Product

Mobile Communications Company

CDMA Handsets, GSM Handsets, 3G Handsets

Monitor, PDP Module, OLED Panel, USB Memory

Digital Media Company

Home Theater System, DVD Recorder, Super Multi DVDRewriter, CDRW, Notebook PC, Desktop PC, PDA, PDA

Phone, MP3 Player, New Karaoke System, Car Infotainment

Number of

Employees

82,772 (29,948 in Korea/ 52,824 overseas) - as of 2007

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http://www.lge.com/http://www.lge.com/


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Financial Highlights (in billion won)

2006 2007

2008 2009 2010 2011

SALES 16,601 18,602 20,176 24,659

23,774 23,170

Domestic 6,084 6,654 4,793 5,086 5,509 5,947

Export 10,516 11,948 15,383 19,573

18,264 17,223

Ordinary

Profit

OrdinaryProfit

573 675 836 1,860 741 261

History

1958Founded as GoldStar

1960's Produces Korea's first radios, TVs, refrigerators, washing machines and airconditioners

1995 Renamed LG ElectronicsAcquires US-based Zenith

1997 Worlds first CDMA digital mobile handsets supplied to Ameritech and GTEin U.S. Achieves UL certification in U.S. Develops worlds first IC set forDTV

1998 Develops worlds f irst 60-inch plasma TV

1999 Establishes LG.Philips LCD, a joint venture with Philips

2001 Launches worlds first internet refrigerator Exports synchronous IMT-2000to Marconi Wireless of Italy Significant exports to Verizon Wireless in U.S.

2002 GSM mobile handset expor ts to Russia, I ta ly and Indonesia Establishesmarket leadership in Australian CDMA market Launches worlds f irstinternet washing machine, air conditioner, and microwave oven

2003 Under LG Holding Company system, spins off to become LG Electronics and

LG Corporation Full-scale export of GPRS color mobile phones to EuropeEstablishes CDMA handset production line and R&D center in China

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2006 Enters North-European and Middle East GSM handset market Achievesmonthly export volume above 2.5 million units (July) Top global CDMA

producer

2007 EVSB, the next-generation DTV transmission technology, chosen to be theUS/Canada Industry standard by the US ATSC Commercializes worlds first55" all-in-one LCD TV

Commercializes worlds first 71" plasma TV Develops worlds first Satellite-and Terrestrial-DMB handsets

2008 Becomes fourth- largest supplier of mobile handsets market worldwide

Develops worlds f irst 3G UMTS DMB handset, 3G-based DVB-H andMediaFLO phones, DMB Phone with time-shift function, a nd DMB notebookcomputer Establishes LG-Nortel, a network solution joint venture with Nortel

2009 LG Chocolate, the f irs t model in LGs Black Labe l ser ies of premiumhandsets, sells 7.5million units world wide Develops the first single-scan 60"HD PDP module Establishes the strategic partnership with ULAcquires the worlds first IPv6 Gold Ready logo

2010 Launches the industry-first dual-format high-definition disc player and drive

Introduces new global brand identity: "Stylish design and smart technology, inproducts that fit our consumer's lives."

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CEO PROFILE

Biography

Yong Nam was appointed Vice Chairman and CEO of LG Electronics effectiveJanuary 1, 2008. His appointment signifies LG's desire to achieve the status ofa highly profitable, technological leader with strong brand power.

Mr. Nam honed his strong business insight during his 30 years of experiencewith LG Electronics, LG Corporate and LG Telecom. He is well-known in theindustry for his s trategic out look, in-depth IT exper ience and global

perspective .

Prior to his appointment, Mr. Nam served as Head of Strategic Business forLG Corporation and was responsible for overall strategic business initiatives.He directly supported the LG Group chairman on a variety of business issues,including telecommunications.

Mr. Nam served as the President and CEO of LG Telecom from 1998 until2007. Under his leadership, the company's revenue increased fivefold from

$560 million to $2.6 billion; subscribers tripled from 2.1 million to nearly 7million; and profits grew to around $250 million in 2006. He was instrumentalin int roducing the world fi rs t mobile in te rnet service, ez -i, and incommercializing mobile banking service BankON, now the number oneconvergence service in Korea.

In 1997, he assumed additional responsibilities, overseeing the ExecutiveOffice for Strategic Projects, LG's corporate-level new business developmentarm. Later that year, he led the Multimedia Division of LG Electronics as VicePresident and transformed the division into a profitable business within just

one year.

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Mr. Nam joined the LG Chairman's Office in 1986. As a Special Assistant tothe Group Chairman, he ran the in-house team that drove change management.He also led corporate-wide efforts to achieve operational excellence andredefine LG's strategic direction.Mr. Nam's career at LG began in 1976 when he joined LG Electronics in theoverseas business planning division. As part of this role, he spent seven yearsin the U.S. in several management positions centered on marketing and sales,which he lped h im, develop a g lobal perspec tive on LG's bus iness .

Mr. Nam is a graduate of Seoul National University, and is fluent in Englishand Japanese in addition to his native Korean. He and enjoys golf, reading andhiking during his leisure time.

Yong Nam was appointed Vice Chairman and CEO of LG Electronics effectiveJanuary 1, 2008. His appointment signifies LG's desire to achieve the status ofa highly profitable, technological leader with strong brand power.

Mr. Nam honed his strong business insight during his 30 years of experiencewith LG Electronics, LG Corporate and LG Telecom. He is well-known in theindustry for his s trategic out look, in-depth IT exper ience and global

perspective .

Prior to his appointment, Mr. Nam served as Head of Strategic Business forLG Corporation and was responsible for overall strategic business initiatives.He directly supported the LG Group chairman on a variety of business issues,including telecommunications.

Mr. Nam served as the President and CEO of LG Telecom from 1998 until2008. Under his leadership, the company's revenue increased fivefold from$560 million to $2.6 billion; subscribers tripled from 2.1 million to nearly 7

million; and profits grew to around $250 million in 2006. He was instrumentalin int roducing the world fi rs t mobile in te rnet service, ez -i, and incommercializing mobile banking service BankON, now the number oneconvergence service in Korea.

In 1997, he assumed additional responsibilities, overseeing the ExecutiveOffice for Strategic Projects, LG's corporate-level new business developmentarm. Later that year, he led the Multimedia Division of LG Electronics as VicePresident and transformed the division into a profitable business within justone year.

Mr. Nam joined the LG Chairman's Office in 1986. As a Special Assistant to

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the Group Chairman, he ran the in-house team that drove change management.He also led corporate-wide efforts to achieve operational excellence andredefine LG's strategic direction.

Mr. Nam's career at LG began in 1976 when he joined LG Electronics in theoverseas business planning division. As part of this role, he spent seven yearsin the U.S. in several management positions centered on marketing and sales,which helped him develop a global perspective on LG's business.

Mr. Nam is a graduate of Seoul National University, and is fluent in Englishand Japanese in addition to his native Korean. He and enjoys golf, reading andhiking during his leisure time.

Major Awards Received by LG Electronics

Following its "Select & Focus" strategy, LG Electronics has resolutelymaintained its efforts towards corporate restructuring. In the process, many ofits accomplishments in its management innovation and productivity innovationactivities were recognized with awards.

2008 Awards

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November 2008 LG Electronics received Best Show Award at the publicityfilm Galaxy Award, and the Grand Award in the corporate

brochures ca tegory .

November 2008 LG Electronics grabbed Best Manufacturer in White GoodsAward in Kazakhstan for the 4th year in a row.

December 2008 LG Electronics received Presidential Prize in the labor-management culture category for large corporations.

December 2008 LG Electronics was chosen among Beijing's 10 MostInfluential Enterprises by Beijing TV(BTV).

December 2008 LG Electronics received Most Promising Vendor of theYear Award at the "Frost &Sullivan Asia PacificTechnology Awards 2008."

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October 2010 LG Electronics was chosen as one of the top 10 electronicsbrands in South Afr ic a - for(or by) peop le aged 25+, andacross businesses and products.

October 2011 LG Electronics received No. 1 Enterprise in Electronics andCommunications Award and Innovation Award as selectedby Brazil' s most prestigious economic magaz ine Is to eDinheiro.


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Apr. 19, 2011

LG ELECTRONICS REPORTS FIRST QUARTER 2010 EARNINGS RESULTS

LG Elec tronics (LG), a leader in consumer elect ronics and mobi lecommunications, announced un-audited earnings results of the three month

per iod ended March 31, 2010. Amount in Korean Won (KRW) are transla tedinto US dollars (USD) at the average rate of three month period in eachquarter, which was KRW 939 per US dollar (2010 1Q), KRW 938 per USdollar (2009. 4Q, QoQ), KRW 977 per US dollar (2009. 1Q, YoY).

To accommodate comprehension of LGs global business, the companyreleased financial earnings in parent format plus additional consolidatedearnings of each division and overseas subsidiaries.

Sales and Profit

For the quarter, the company posted a revenue of KRW 6.03 trillion (USD6.43 billion) on a parent basis, increased by 4.0% from a year earlier thanks torobust sales of premium handsets and home appliances. On a consolidated

bas is wh ich includes sales of LGs overseas subs idiaries , revenue reachedKRW 9.59 trillion (USD 10.22 billion), increased by 8.3% from the previous

year.

Operating profit was KRW 173 billion (USD 184 million) on a parent basiswith a margin of 2.9% compared to KRW 191 billion (USD 204 million) froma year earlier primarily due to a sluggish display and media business in spiteof a remarkable turnover in mobile business and solid performance ofappliance business. Situation on a consolidated basis was KRW 28 billion(USD 29.4 million) hurt by overseas subsidiaries operating loss of KRW 133

billion (USD 142 mi ll ion) .

Net Profi t was a lo ss of KRW 123 billion (USD 131 mil lion) on a paren t basi smainly due to loss in equity method of KRW 193 billion (USD 205 million)from LG.Philips LCD and overseas subsidiaries.

Consolidated performances by business division are as follows;

Mobile Communication Company recordedsales of KRW 2.51 trillion (USD 2.67bi llion), 14 .7% higher than a year ear li er . Revenue from the handset businessrose 17.8% to KRW 2.35 trillion (USD 2.50 billion) from KRW 2.00 trillion

(USD 2.05 billion). Consolidated sales based total shipments were 15.8 million

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units, compared to 14.1 million units YoY and 17.9 million units QoQ.

Success of Shine phone and DMB line-ups in Korea pushed up shipments46% QoQ, and continued high demand of premium Chocolate phone in GSMopen-markets led a shift of 28% QoQ. Strong growth in WCDMA phones saleswas realized in Korea and the United States. Operating margin was 4.7%, a bitless than 6.6% on a parent basis, but recovered from a loss of 2.6% from thefirst quarter of 2007.

Digital Appliance Company sales rose 15.1% to KRW 2.94 trillion (USD 3.13

billion) from a year earli er , thanks to growth in premium product lines .Improvement of an operating profit was remarkable. KRW 169 billion (USD17.9 million) was 43.6% higher than a year earlier and 37.1% from the

previous quarter. Operat ing marg in inc reased 1.1% point to 5. 7% despit e wonappreciation and rise in material costs. On a parent basis the margin rose 1.8%

point to 12.0%.

Digital Display Company sales including plasma display panels and flat panelTVs and monitors rose 1.5% to KRW 2.75 trillion (USD 2.93 billion) from the

previous year , but pos ted an operating loss of KRW 262 bi llion (USD 2. 79million). Sales from Digital Media Companys media and IT products postedKRW 1.38 trillion (USD 1.47 million), 4.7 % down from a year earlier. Slowin display and media business stems from seasonality plus intensified priceerosion, but mainly due to lower efficiency in capacity of plasma display

panels.

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INDUSTRY PROFILE

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INDUSTRY PROFILE

Electronics is the study of the flow of charge through various materials and devices

such as, semiconductors, resistors, inductors, capacitors, nano-structures, andvacuum tubes. All applications of electronics involve the transmission of eitherinformation or power. Although considered to be a theoretical branch of physics, thedesign and construction of electronic circuits to solve practical problems is anessential technique in the fields of electronics engineering and computerengineering.

The study of new semiconductor devices and surrounding technology is sometimesconsidered a branch of physics. This article focuses on engineering aspects ofelectronics. Other important topics include electronic waste and occupational health

impacts of semiconductor manufacturing.

Consumer Durables(Data table headings are shown Year-wise in descending order)

Air Conditioners

Bicycles

Crystal Glass

Domestic Electrical Appliances

Gems and Jewellery

Glass Products

Kitchen Equipment

Liquefied Petroleum Gas Cylinders

Microwave Ovens

Refrigerators

Sewing Machines

Sunglasses

Toys and Games

Washing Machines and Vacuum Cleaners

Watches and Clocks

White Goods

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Writing Instruments

INTRODUCTION OF BUDGET & BUDGETARY

CONTROL

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CAPITAL BUDGET:

Capital Budgets are prepared separately for items to be procured through

Internal resources institutional Term Loans

Customer Financial Funds

Government Grants

The budget items, which were already approved in RE 2006-07, and BE 2007-08may be reviewed for inclusion\deletion.

All capital budgets [proposals of items more than Rs. 10 lakhs will be backed with proper

justification and the Cost Benefit Analysis. After receipt of all Budget proposals, Finance

Department will compile and prioritize the requirements in consultation with the Shop In

charges\Production personnel.

Based on the availability of funds, items will be differed\dropped in consultation with the top

management and Capital Budget will be finalized.

REVENUE BUDGET:

To prepare Revenue Budget, Marketing, PPC and Shop In charges\Department heads are

requested to compile their respective budgets and send to Finance Department.

To Start with the Marketing department finalize the order book\ Sales Budgets and sentproduction Budget in coordination with various product ion shops While preparing the

production programme necessary care will be taken to liquidate the existing work-in-

progress(WIP).

Based on consumption details of the various shops, Purchase Department will prepare

procurement budget considering the opening stock and norm of inventory holding etc.

Development of new grades may be indicated separately and R&D Budget will be prepared.

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Manpower Budget will be furnished by the Personnel department in consultation with respective

shops\departments.

Production Shop In charges will estimate the expenditure on off loading jobs based on

production plans. After collection of all required data Finance Department will compile the

Revenue Budge and funding position will be finalized. While preparing various

estimates\Budgets, necessary provisions will be incorporated to take care of future escalations.

For each element of major expenditure, separate Budgets will be prepared.

Once the budget is finalized, it will be put into Board and Board approval it will sent to Ministry.

Budget copies will be circulated to all the Shops\Departments after approval.

All capital and revenue expenditure proposal are concurred subject to budgetary provisions.

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Limitations of Budgetary Control:

The preparation of a budget under inflationary conditions and changing

Government policies is really difficult. Thus, the accurate position of the business

can not be estimated.

Accuracy in budgeting comes through expenditure. Hence it should not be relied on

too much in the initial stages.

Budget is only a management tool. It is not a substitute for management. It can not

replace management in decision making.

Budgeting involves a heavy expenditure, which small concerns cannot afford.

There will be active and passive resistance to budgetary control as it points out the

efficiency or inefficiency of individuals.

The success of budgetary control depends upon wiling co-operation and team work.

This is often lacking.

Frequent changes maybe called for in budgets due to fast changing industrial

climate. It may be difficult for a company to keep pace with these fast changes,

because revision of budgets is expensive exercise.

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OBJECTIVES OF BUDGETARY CONTROL:

Planning:

A budget is a plan of the policy to be pursued during the defined period of time to

attain a given objective. The budgetary control will force management at all the activities tobe done during the future periods. A budget as a plan of action achieves the following

purposes:

Action is guided by well thought out plan because a budget is prepared after a

careful sturdy and research.

The budget serves as a mechanism through which.

Managements objectives and policies are affected.

It is a bridge through which communication is establishment between the top

management and the operatives who are to implement the policies of the top

management.

The most profitable course of action is selected from the various available

alternatives.

Co-ordination:

The budgetary control co-ordinates the various activities of the firm and secures

co-operation of all concerned so that the common objective of the firm may be successfully

achieved. It forces executives to think and think as a group. It co-coordinating the policies,

plans and actions. An organization without a budgetary control is like a ship sailing in a

chartered sea. A budget gives direction to the business and imparts meaning and

significance to its achievement by making comparison of actual performance and budgeted

performance.

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Motivation:

It employees have actively participated in budget preparation and if they are

convinced that their personal interests are closely associated with the success of

organizational plan, budgets provide motivation in the form of goals to be achieved. The

budgets will motivate the workers, depends purely on how the workers have been mentally

and physically involved with the process of budgeting.

Control:

Control consists of the action necessary to ensure the performance of the

organization conforms to the plans and objectives. Control of performance is possible with

predetermined standards which are laid down in a budget. Thus, budgetary control makes

control possible by continuous comparison of actual performance with that of the budget so

as to report the variations from the budget to the management of corrective action.

Thus, budgeting system integrates key managerial functions as it links top

managements planning function with the control function performed at all levels in the

managerial hierarchy. But the efficiency of the budget as a planning and control device

depends upon the activity in which it is being used. A more accurate budget can be

developed for those activities where direct relationship exists between inputs and outputs.

The relationship between inputs and outputs becomes the basis for developing budgets and

exercising control.

Approved Plan:

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A mater budget provides an approved summary of results to be expected from

proposed plan of operations. It concerns all functions of organization and serves as a guide

to executives and departmental heads responsible for various departmental objectives.

Communication:

The employees of an organization should know organizational aims, objectives of

subunits (budgets centers) and the part that they have to play for their attainment. Budgets

effectively communicate this information to employees. Besides, budges keep different

sections of the organization informed about the contribution of different subunits in the

attainment of overall organizational objective.

Budget procedures:

Having the budget organization and fixed the period, the actual work or budgetary

control can be taken upon the following pattern.

STEPS IN BUDGETING CONROL:

Organization for budgeting:

The setting up of a definite plan of organization is the first step towards installing

budgetary controlling system in an organization a budget manual should be prepared giving

details of the powers, duties, responsibilities and areas of operation of each executive in the

organization.

Budget Manual:

A Budget manual lays down the details of the organizational set up, the routine

procedures and programmers to be followed for developing budgets for various items andthe duties and responsibilities of the executives regarding the operation of the budgetary

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control system. CIMA England defines a budget manual as a document schedule or

booklet which sets out, inter alia, the routine of and the forms and records required for

budgetary control. Thus, it is a written document which guides the executives in preparing

various budgets. Budgets are to be drawn keeping in view the objectives of the

organization given in the budget manual. Responsibility and functions of each executive in

regard to budgeting are written down in the budget manual to avoid any duplication or

overlapping of responsibilities. Steps and the methods for developing various budgets and

the methods of reporting performance against the budget are written down in the budget

manual. In short it is a written document which gives everything relating to the preparation

and execution of various budgets. It should be clear and there should be no ambiguity in it.

The following are some of the most important matters covered in a Budget manual:

a) Introducing and brief explanation of the objects, benefits and principles of

budgetary control.

b) Organization chart giving the titles to different personnels with full explanation

of the duties of each to operating system and preparation of departmental and

functional budgets.

c) Length of budget periods and control periods should be clearly stated.

d) A method of accounting and control of expenditure.

e) A statement showing the responsibility and of authority given to each manger

for approval of budgets, vouchers and all other forms and documents which

authorize them to spend the money. The authority for granting approval must be

clearly stated.

f) The entire process of budgeting programme including the time table for

periodical reporting. A schedule should be drawn for this.

g) Purpose, specimen form and number of copies to be used for each report and

statement. Budget centers involved should also be stated clearly.

h) Outline of main budgets and their accounting relationships.

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i) Explanation of key budgets.

FIXATION OF BUDGET PERIOD:

The budget period mean the period for which a budget is prepared and employed.

The budget period will depend upon the type of business and the control aspect.

Budget period mean the period for which a budge is prepared and employed. The

budget period depends upon the nature of the business and the control techniques. For

example, in case of seasonal industries (i.e., food or clothing) the budget period should be a

short one and should cover one season. But in case of industries with heavy capitalexpenditure such as heavy engineering works, the budget period should be long enough to

meet the requirements of the business. From control point of view, the budget period

should be a short one so that the actual results may be compared with the budget each week

end or month end and discussed with and discussed with the Budget committee. Long term

budgets should be supplemented by short term budgets to make the budgetary control

successful, as short-terms budgets will helping exercising control over day-today

operations. In short, the budget period should not be too long so that there may be

sufficient time before budget implementation. For most business, annual budget is quite

common because it compares with the financial accounting year.

There should be a regular time plan for budget preparation. It may be on the following

lines.

Long-term budgets for three to five years should be prepared for expansion and

modernization of the undertaking, introduction of new products or new projects and

undertaking heavy advertisement.

Annual budgets coinciding with financial accounting year should be prepared for

the operations activities (i.e., sales, purchases, and production etc, of the business)

For control purposes, short-term budgets-monthly or even weekly budget-should be

prepared for watching progress of actual performance against targets. Short-term

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budgets are prepared to see that actual performance is proceeding according to the

budgets and early corrective action may be taken if there is any pitfall.

The responsibility for preparation and implementation of the budgets may be fixed

as under.

Budgetary controller:

Although the chief executive l finally responsible for the budgetary programme. It

is better if a large part of the supervisory responsibility is deluged to an official designated

as Budget Controller or Budget Director. Such a person should have knowledge of the

technical details of the business and report directly to the president or the chief executive.

Rolling (Continues) Budget:

This is a budget which is updated continuously by adding a further period (a

month\quarter) and deducting a corresponding earlier period. Budgeting is a continuous

process under these methods of preparation of budget. Once the first period elapses, the

forecast for that period is dropped and the forecast for the future period beyond the existing

could not be predicted and forecast reliably, this method is useful. However, it is a costly

exercise but matched by considerable reduction in operational variances.

Annual Vs Continues budgeting system:

In some organizations budgets are prepared on annual basis. But annual budgets

may not help the management to have control because variances due to rapidly changing

conditions affect the sales in quantity and prices, severe rapidly changing conditions affect

the sales in quantity and prices, severe inflationary conditions exist resulting fast increase

in the prices of inputs without reflecting in sales prices immediately and wide range of

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products being produced making it not feasible to have precise estimate of levels of activity

for a year.

The procedure in continuous budgeting will be that a year will be divided into four

quarters. Monthly budgets for the first quarter and three quarterly budgets for the next year

can be prepared. For the first quarter precise estimates can be drawn up monthly. The

budget estimates for the second quarter may be revised working out separately monthly

estimates on more precise basis for control purposes before the starting of the second

quarter.

Similarly procedure may be followed for third and fourth quarters. This method a time

which need not be in respect of or coincide with the financial year. It will enable to evolve

a precise plan of action and control of variance functions at least for the immediate quarter

and a broad tentative one the subsequent three quarters on a continues basis.

Principal Budget (limiting) factor:

Principal budget factor is such an important factor that it would affect all the

functional budgets to a large extent. The extent of its influence must be assessed first in

order to ensure that functional budgets are reasonably capable of fulfillment. This is the

factor in the activities of an undertaking which at a particular point in time or over a period

will limit the volume of output. It is the governing factor which is a major constraint on all

the operational activities of the organization, so this factor is taken into consideration to

determine whether the budgets are capable of attainment. It is essential to locate the

limiting factor may be any one of the following:

Is there sufficient demand for the product? (customer demand)

Will a required quality and quantity of materials be available? (availability of raw material)

Is the plant capacity sufficient to cope up with the expected sales? (plant capacity)

Is the required type of labor available? (available of labor)

Is cash position sufficient to finance the expected volume of sales? (cash position)

Are there any Government restrictions? (Government restrictions)

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For example, a concern has the capacity to produce 50,000 units of particular item per year.

But only 30, 000 units can be sold in the market. In this case, low demand for the product is

the limiting factor. Therefore, sales budget should be prepared first and other functional

budgets such as production budget, labor budget, plant utilization budget, cash budget etc.

should be prepared in accordance with this case plant capacity is limited. Therefore,

production budget should be prepared first and other budgets should follow the production

budget.

Thus, the budget relating to limiting factor should be prepared first and the other

budgets should be prepared in the light of that factor. All budgets should be co-coordinated

keeping in view the principal budget factor if the budgetary control is to achieve the desired

results.

Principal budget factor is not static. It may vary rapidly from time to time due to

internal and external factors. It is of temporary nature and in the long run can be overcome

by suitable management taking sales promotion steps as increasing sales staff and

advertising. Plant capacity can be improved by better planning, simplification of product or

extension of plant.

DIFFERENT TYPES OF BUDGET:

Different types of budgets have been developed keeping in view the different

purposes they serve. Budgets can be classified according to:

The coverage they encompass;

The capacity to which they are related;

The conditions on which they are based; and

The periods which they cover.

Functional Budget:

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A functional budget is a budget which relates to any of the functions of an

undertaking e.g., sales, production, research and development, cash etc, the following

budgets are generally prepared.

Budget prepared by

1. Sales Budget including selling and Sales Manager

Distribution Cost Budget

2. Production Budget Production Manager

3. Material Budget Purchase Manager

4. Labor and Personnel Budget Personnel Manager

5. Manufacturing Overheads Production Manager

6. Administration Cost Budget Finance Manager

7. Plant Utilization Budget Production Manager

8. Capital Expenditure Budget Chief Executive

9. Research and Development

Cost Budget R&D Manager

10. Cash Budget Finance Manager

Sales Budget:

Sales budget is the most important budget and of primary importance. It forms the

basis on which all the budgets are built up. This budget is a forecast of quantities and

values of sales to be achieved in a budget in a budget period. Every effort should be made

to ensure that its figures are as accurate as possible because this is usually the starting

budget (sales being limiting factor on which all the other budgets are built up). The sales

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Manger should be made directly responsible for the preparation and execution of the

budget. The sales budget may be prepared according to products, sales territories, types of

customers; salesmen etc., in the preparation of the sales budget, the sales manager should

take into consideration the following factors:

1. Past Sales Figures and Trends.

2. Salesmens Estimation.

3. Plant Capacity.

4. Availability of Raw Material and other Supplies.

5. General Trade Prospects.

6. Orders in Hand.

7. Seasonal Fluctuations.

8. Financial Aspect.

9. Adequate Return on Capital Employed.

10. Competition.

11. Miscellaneous Considerations.

Production Budget:

Production budget is a forecast of the total output of the whole organization broken

down into estimates of output of each type of product with a scheduling of operations (by

weeks and months) to be performed and a forecast of the closing finished stock. This

budget may be expressed in quantitative (weight, units etc) r financial (rupees) units or

both. This budget is prepared after taking into consideration the estimated opening stock,

the estimated sales and the desired closing finished stock of each product. The works

manger is responsible for the total production budget and the departmental managers are

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responsible for the departmental production budget. In preparing the production budget, the

following factors are considered.

The time lag between the production in the factor and sales to the customer should

be considered so as to allow fro the time required or the dispatch of goods from the factory

to the place of the customers.

The stock of goods to be maintained both at the factorys go gown and at he sales centers.

The level of production needed to meet the sales programme. Monthly production

targets should be fixed and it should be seen that production is kept more or less at uniform

level throughout the year. The material labor and plant requirements should be ascertained

to have the desired production to meet the sales programme.

The sales and the production are inter-dependant because production budget

is governed by the sales budget and the sales budget is largely determined by the

production capacity and by production costs.

Cost of production Budget:

After determining the volume of output the cost of procuring the output must be

obtained by preparing a cost of production budget. This budget is an estimate of cost of

output planned for a budget period and may be classified into material cost budget, labor

cost budget and overhead budget because cost of production includes material, labor and

overheads.

Materials Budget:

In drawing up the production budget, one of the first requirements to be considered

is material. As we know, materials may be direct or indirect. The materials budget dealswith the requirements and procurement of direct materials. Indirect materials are dealt with

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under the works overhead budget. The budget should be related to the production budget

and the period of the budget should be of short duration because this budget has an

important bearing on the cash budget.

Purchase Budget:

Purchase Budget is mainly dependent on production budget and material

requirement budget. This budget provides information about the materials to be acquired

from the market during the budget period.

Purchase budget should be prepared by the purchase manger by getting relevant

information about capital items, tools, general supplies and direct materials required during

the budget period from other related departments. Like other budgets, the purchase budget

has to be approved by the budget committee. After approval it becomes the responsibility

of the purchase officer to see that purchases are made as per the purchase budget.

Sometimes additional purchases which are not covered by the purchase budget are made

under the following circumstances.

If there is increase in production not anticipated while preparing the purchase

budget and purchase of larger quantities of materials becomes necessary.

If accumulation of stock becomes necessary to avoid shortage of materials.

If overstocking is desired to take advantage of lower prices and there is fear that

price will increase in near future.

The purchase manger should get additional sanctions from the higher authorities for

making the additional purchases not covered by the purchase budget.

Direct Labor Budget:

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This budget gives as estimate of the requirements of direct labor essential to meet

the production target. This budget may be classified into labor Requirements budget and

recruitment budget. The labor recruitment budget is developed on the basis of requirement

of the production budget given and detailed information regarding he different classes of

labor e.g., fitters, welders, turner, millers, and grinders and drillers etc., required for each

department, their scales of pay and hours to be spent. This budget is prepared with a view

too enable the personnel department to carry out programmers of training and transfer and

to find out sources of labour needed so that every effort may be made to remove difficulties

arising in production the available workers in each department, the expected changes in the

labour force during the budget period due to the labour turnover. This budget gives

information about the personnel specification for the jobs for which workers are to be

recruited, the degree for skill and experience required and the rates of pay. Where standard

costing system is applied, the labor cost budget is dev eloped on the basis of standard labor

cost per unit multiplied by the quantity of anticipated production determined in the

production budget. If standard costing system is not being followed in the organization, the

information of labour cost may be obtained from past records or estimated cost.

Sometimes another budget known as Manpower budget is prepared. This budget

gives the requirements of direct and indirect labour necessary to meet the programme set

out in the sales, manufacturing, maintenance, research and development and capital

expenditure budgets. The labor terms are expressed of rupee value, number of labour hours,

number and grade of workers etc. this budget makes provision for shift and overtime work

and for the effective training for new workers on labour cost.

Manufacturing Overheads Budget:

This budget gives an estimate of the works overhead expenses to be incurred in a

budget period to achieve the production target. The budget includes the cost of indirect

material, indirect labour and indirect works expenses. The budget may be classified into

fixed cost, variable cost and semi-variable cost. It can be broken into departmental

overhead budget to facilitate control. In preparing the budget, fixed works overhead can be

estimated on the basis of past information after taking into consideration the expected

changes which may occur during the budget period. Variable expenses are estimated on the

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basis of the budgeted output because these expenses are bound to change with the change

in output.

The Cost Accountant prepares this budget on the basis of figures available in the

manufacturing overhead ledger or the head of the workshop may be asked to give estimates

for the manufacturing expenses. A good method is to combine the estimates of the Cost

Accountant and the shop executive.

Administrative Expenses Budget:

This budget covers the expenses incurred in framing policies, directing the

organization and controlling the business operations. In other words, the budget provides as

estimate of the expenses of the central office and of management salaries. The budget can

be prepared with the help of past experience and anticipated changes. Budget may be

prepared be prepared for each administration department so that responsibility for

increasing such expenses. This budget covers the expenses incurred in framing policies,

directing the organization and controlling the business operations. In other words, the

budget provides an executive. Much difficulty is not experiences in developing such budget

as most of the administration expenses are of a fixed nature. Although fixed expenses

remain constant and are not related to sale volume in the sort run, they are dependent upon

sales in the long run. With a small change in output, they do not change. However, if there

is persistent fall in output, administration expenses will have to be reduced by discharging

the services of some members of the staff and taking other economy measures. On the

other hand, with persistent increase in output or business activity, administration expenses

will increase but they may lag behind business activity.

Budgeted Income Statement:

A budgeted income statement summarizes all the individual budges i.e., sales

budget, cost of goods sold budget, selling budget, and administrative sales budget. This

budget determines income before taxes. If the tax rate is available net income after taxes

can also be computed.

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Selling and Distribution Costs Budget:

This budget is the forecast of the cost selling and distribution for budget

period and is clearly related to the sale budget. All expenses related to selling and

distributions of the various products as indicated in the sales budget are included in it.These expenses are based on the volume of sales set in the sales budget and budget and

budgets are prepared for each item of selling and distribution overhead. Long term

expenses.

As advertisement are spread over more than one period. Selling and distribution

overheads are divided into fixed and variable category with reference to volume of sales.

Separate budgets are prepared for variable and fixed items of selling and distribution

overheads. Certain items of selling and distribution costs as cost of transport department

are included in the departmental production cost budget from control point of view rather

that including in selling and distribution costs budget.

Plant Utilization Budget:

This budget lays down the requirements of plant capacity to carry out the

production as per the production programme. This budget is terms of convenient physical

units as weight or number of products or working hours. The main functions of this budget

are:

It will show the machine load in each department during the

Budget period.

It will indicate the overloading on some departments, machine or group of machine

and alternative courses of actions as working overtime, off loading, procurement or

expansion of plants, sub-contracting etc., can be taken.

Idle capacity in some departments may be utilized by making efforts to increase the

demand for the products by providing after sale service, conducting advertisement

campaign, reducing prices, introducing lucky prize coupons, recruiting efficient

sales staff etc.

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Capital Expenditure Budget:

The capital expenditure budget gives an estimate of the amount of capital that may

be needed for acquiring the assets required for fulfilling production requirements a

specified in the production budget. The budget is prepared after taking into consideration in

the available productive capacities, probable reallocation of the existing assets such as plant

and equipment budget, building budget etc. The capital expenditure budget is an important

budget proving for acquisition of assets, necessitated by the following factors:

RESEARCH AND DEVELOPMENT COST BUDGET:

While developing research and development cost budget, it should be clear in mind

that work relating to research and development is different from that relating to the

manufacturing function. Manufacturing function gives quicker results than research and

development which may go on for several years. Therefore, these budgets are established

on a long term basis; say for 5 to 10 years which can be further subdivided into short-term

budgets on annual basis. As a rule research workers are less cost conscious; so they are not

susceptible to strict control. A research and development budget is prepared taking into

consideration the research projects in hand and the new research projects in hand and the

new search and development projects to be taken up. Thus this budget provides an

estimate of the expenditure to be incurred on research and development during the budget

period.

After fixation of the research and development cost budget, the research executive

fixes priorities for the various research and development projects and submits research and

development project authorization forms to the budget committee. The projects are finally

approved by the senior executive. Before giving the approval, the expenditure on research

and development is matched against the benefits likely to be availed of from the new

project; after the approval of the budget, a close watch is kept on the expenditure so that it

may not exceed budget provisions. It is also seen that extent of progress made is

commensurate with the expenditure incurred.

CASH (FINANCIAL) BUDGET:

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The cash budget can be prepared by any of the following method:

1. Receipts and payments method

2. The adjusted profit and loss method3. The balance sheet method

1. Receipts and payments method: In case of this method the cash receipts from

various sources and the cash payments to various agencies are estimated. In the

opening balance of cash, estimated cash receipts are added and from the total of

estimated cash payments are deducted to find out of the closing balance.

2. The adjusted profit and loss method: In case of this method the cash budget is

prepared n the basis of opening cash and bank balance of the various assets an

liabilities.

3. The balance sheet method: With the help of budget balances at end except cash and

bank balances, a budgeted balance sheet can be prepared and the balancing figure

would be the estimated closing cash\bank balance.

Thus under this method, closing balances, other than cash\bank will have to be found out

first to be put in the budget balance sheet. This can be done by adjusting the anticipated.

Master Budget (Finalized Profit Plan):

The Master Budget is consolidated summary of the various functional budgets. It

has been defined as a summary of the budget schedules in capsule form made for the

purpose of presenting, in one report, the highlights of the budget forecast. The definition

of this budget given by the Chartered Institute of Management Accountant, England, is as

follows:

Thus summary budget incorporating its components functional budgets and which

are finally approved and employed

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The master budget is prepared by the budget committee on the basis of co-

coordinated functional budgets and becomes the target for the company during the budget

period when it is finally approved by the committee. This budget summaries functional

budget to produce a budgeted Profit and Loss Account and a Budget Balance Sheet as at

the end of the budget period.

Fixed Budget:

This budget is drawn for one level of activity and one set of conditions. It has been

defined as a budget which is designed to remain unchanged irrespective of the volume of

output or turnover attained. It is rigid budget and is drawn on the assumption that there

will be no change in the budgeted level of activity. A fixed budget will, therefore, be

useful only when the actual level of activity corresponds to the budgeted level of activity.

A master budget tailored to a single output level of (say) 20,000 units of sales is a typical

example of a fixed budget. But in practice, the level of activity and set conditions will

change as a result of internal limitations and external factors like changes in demand and

price, shortage of materials and power, acute competition etc. It is hardly of any use as a

mechanism of budgetary control because it does not make any distinction between fixed,

variable and semi-variable costs and provides for no adjustment in the budget fixed as

result of change in cost due to change in level of activity. It is also not helpful at all in the

fixation of price and submission of tenders.

Flexible Budget:

The Chartered Institute of Management Accountants, defines a flexible budget also

called sliding scale budget as a budget which, by recognizing the difference in behavior

between field an d variable costs in relation to fluctuations in output, turnover, or other

variable factors such a number of employees, is designed to change appropriately with such

fluctuations. This, a flexible budget gives different budgeted costs for different levels of

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activity. A flexible budget making an intelligent classification of all expenses between

fixed, semi-variable and variable because the usefulness of such a budget depend upon the

accuracy with which the expenses can be classified. Such a budget is prescribed in the

following cases.

Where the level of activity during the year varies from period, either due

to the seasonal nature of the industry or to variation in demand.

Where the business is a new one and it is difficult to foresee the demand.

Where the undertaking is suffering from shortage of a factor of

production such as materials, labour, plant, capacity etc. The level of

activity depends upon the availability of such a factor of production.

Where an industry is influenced by changes in fashion.

Where there are general changes in sales.

Where the business units keep on introducing new products or make

changes in the design of its products frequently.

Where the industries are engaged in make to order business like

shipbuilding.

Basic Budget:

A Basic budget has been defined as a budget which is prepared for use unaltered

over a long period of time. This does not take into consideration current conditions andcan be attainable under standard conditions.

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Current Budget:

A Current budget can be defined a budget which is related to the current conditionsand is prepared for use over a short period of time. This budget is more useful than a basic

budget, as a target of lays down will be corrected to current conditions.

Long-Term Budget:

A Long-term budget can be defined as a budget which is prepared for periods

longer than a year. These budgets help in business forecasting and forward planning.

Capital Expenditure Budget and Research and Development Budget are examples of long-

term budgets.

Short- Term Budget:

This budget is defined as a budget which is prepared for period less than year and is

very useful to lower levels of management for control purposes. Such budgets are prepared

for those activities the trend in which is difficult to foresee over longer periods. Cash

budget and material budget are examples of short term budget.

Performance Budget:

Performance Budgeting has its origin in U.S.A. After Second World War it tries to

rectify some of the shortcoming in the traditional budget. In the traditional budget amount

are earmarked for the objects of expenditures such as salaries, travel, office expenses, grant

in aid etc. In such system of budgeting the money concept was given more prominence i.e.

estimating or projecting rupee value for the various accounting heads or classification of

revenue and cost. Such system of budgeting was more popularly used in government

department and many business enterprises. But is such system of budgeting control of

performance in terms of physical units or the related costs cannot be achieved.

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Performance oriented budgets are established in such a manner that each item of

expenditure related to a specific responsibility centre is closely linked with the performance

of that centre. The basic issue involved in the fixation of performance budgets is that of

developing work programmers and performance expectation by assigned responsibility,

necessary for the attainment of goals and objectives of the enterprise, it involves

establishment of well defined centers of responsibilities, establishment for each

responsibility centre-a programmed of target performance e in physical units, forecasting

the amount of expenditure required to meet the physic al plan laid down and evaluation of

performance.

Zero Based Budgets:

This budge is the preparation of budget starting from Zero or from a clean state. As

a new technique it was proposed by Patter Peal of Texas Instruments Inc., U.S.A. This

technique was introduced in the budgeting in the state of Georgia by Mr. Jimmy Carter

who was then the Government of that state. ZBB was tried in federal budgeting as a means

of controlling state expenditures.

The use of zero-based budgeting as a managerial tool has become increasingly

popular since the early 1970s It is steadily gaining acceptance e in the business world

because it is providing it utility as a tool integrating the managerial function of planning

and control. ZBB is not based on the incremental approach and previous years figures are

not adopted as a base. Rather, zero is taken as a base aw the name goes. Taking zero as a

base, a budget is developed on the basis of likely activities for the future period. In ZBB,

by declining the budget from the past, the past mistakes are not repeated. Funds required

for any for the next budget period should be obtained by presenting a convincing case.

Funds will not be available as a matter of course.

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ADVANTAGES OF BUDGETARY CONTROL:

The most important advantage of a budgetary control is to enable management to

conduct business in the most efficient manner because budgets are prepared to get the

effective utilization of resources and the realization of objectives as efficiently.

It lies down as objective for the business as a whole. Even though a monetary

reward is not offered the budget becomes a game a goal to achieve or a target to shoot at

and hence it is more likely to be achieved or hit that if there was no predetermined goal or

target. The budget is an impersonal policeman that maintains ordered effort and brings

about efficiency in result. It ensures effective utilization of men, materials, machines and

money because production is planned according to the availability of these items.

Everyone working in the concern knows what exactly to do because budgetary

control laid emphasis on the staff organization. It ensures that individual responsibilities

are clearly defined and that the required authority commensurate with the responsibility is

delegated so that buck passing ay is prevented when the budgeted results are not achieved.

Budgetary control takes the help of different levels of management in the preparations of

the budget. Budget finally approved represents the judgment of the entire organization and

not merely that of an individual or a group of individuals. Thus, it ensures team work.

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Management by exception is possible because the comparison of actual and budgeted

results points out weak spots so that remedial action is taken against weak spots which are

not in conformity with the budgeted performance.

Budgetary control creates conditions for setting up a system of standard costing.

It is helpful in reviewing current trends in the business and in determining further

policy of the business because current and future trends are studied in the preparation of the

budget.

DISADVANTAGES OF A BUDGET:

While budgets may be essential part of activity they do have number of disadvantages,

particularly in perception terms.

Budgets can be seen pressure devices imposed by management, thus resulting in:

a) bad labor relations

b) Inaccurate record-keeping.

Departmental conflict arises due to:

a) dispute over resources allocation

b) Departmental blaming each other if targets are not attained. It is difficult to reconcile

personal\individual and corporate goals. Waste may arise as managers adopt the view, we

had better sped it or we will lose it. This is often coupled with empire building in order

to enhance the prestige of department. Responsibility versus controlling, i.e. some costs

are under the influence of more than one person, eg. Power costs.

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ANALYSIS AND INTERPRETATION

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COST OF PRODUCTION BUDGET (2007-2008)

PARTICULARS BE RE Estimate for actual

Output

Actuals Variance %of

vop

Sales 12000 12000 10430 1570(adv)

Value of production 11172 10750 9701 1049(adv)

Cost of production

Raw materials 3710 4028 (9701/10750)* 40283635

3556 79(fav) 37.47

36.66

Consumables 730 640 (9701/10750)*640 578 492 86(fav) 5.95 5.07

Power 717 697 (9701/10750)*697 629 537 92(fav) 6.48 5.54

Fuel 946 666 (9701/10750)*666 601 456 145(fav) 6.2 4.7

Repairs &Maintenance

350 350 (9701/10750)*350 316 367 51(adv) 3.26 3.78

Off loading 603 6680 (9701/10750)*680 614 650 36(adv) 6.33 6.7

Total variable cost 7056 7061 6372 6058 314(fav)

Salaries & Wages 3182 3099 3093 6(fav)

Other expenses

Factory Expenses 72 56 77 21(adv)

Admin & Sellings 358 377 281 96(fav)

Depreciation 450 300 375 75(adv)

R&D 103 83 0 83(fav)

Amortization 10 5 10 5(adv)

Interest 20 25 4 21(fav)

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Total fixed cost 4195 3945 3840 105(fav)

Total Cost of Prod 11251 11006 9898 1108(fav)

Operating profit -79 -256 -196 60(fav)

Capacity utilization 77% 96% 74% 22%(adv)

Sales quantity (tones) 2108 2611 2017 594(adv)

INVENTORY BUDGET (2007-2008)

(Rs. In Lakhs)

ARTPCULARS BE RE ACTUALS VARIANCE

Raw materials 1300 800 1125 325(adv)

Consumables 700 600 625 25(adv)Spares 425 350 287 63(fav)

Internally generated 550 800 1085 285(adv)

Work in progress 3211 2934 3425 491(adv)

Finished goods 10 10 124 114(adv)

Total inventory 6196 5494 6671 1177(adv)

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DETAILS OF SALARIES AND BENEFITS (2007-2008)

(Rs. In Lakhs)

PARTICULARS BE RE ACTUALS VARIANCE

Salaries & Allowances 2047 1992 2054 62(adv)

Leave encashment 91 125 134 9(Adv)

Comp Off 90 72 27 44(fav)

Incentive Bonus 100 35 87 52(adv)

Statutory Bonus 34 0 0 0

Stipend to Trainees 15 15 13 2(fav)

PF(Incl. Insp.) 216 205 225 20(Adv)

Gratuity 161 186 97 89(fav)

VRS 54 114 135 21(adv)

Misc 5 7 4 3(fav)

2813 2751 2776 25(adv)

WELFARE

EXPENSES

Canteen Expenses 65 50 47 3(fav)

(Less Receipts) 0 -10 -16 6(fav)Health Care 90 95 100 5(adv)

Family Welfare 6 5 5.43 0.43(adv)

Liveries 6 12 14.53 2.53(adv)

LTC 17 13 3.42 9.58(fav)

Transport 93 60 55 5(fav)

Less Receipts) -6 -3.5 -6.28 0.28(fav)

Conv. Allowance 28 35 44 9(adv)

Children EducationAllowance

10 12 12.39 0.39(adv)

Staff Welfare 6 8 0.05 7.95(fav)Int. Subsidy on 26 25 18 7(fav)

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House Loans

Township Expenses 22 18 17 1(fav)

Less Receipts) -3 -3 -2.47 0.53(adv)

Township Expenses 29 31 25 6(adv)

School

TOTAL WELFARE 389 347.5 317.07 28(fav)GRAND TOTAL 3202 3098.5 3093.07 3(fav)

DETAILS OF OTHER EXPENSES (2007-2008)


FACTORY EXP (A)

Water 27 10 33 23(Adv)

Rates & Taxes 3 3 3.57 0.57(Adv)

Insurance 35 28 22 6(fav)

Amortizing Tools 1 0.75 0.43 0.32(fav)Miscellaneous 15 14 18 4(adv)

81 55.75 77 21(Adv)

ADMN. EXP (B)

Rent & service charge 3.5 12 12 2(fav)

Postage Telephone &Telex

43 30 32.5 2.50(fav)

Printing & Stationery 15 20 16 4(fav)

Travel Expenses 40 60 36 24(fav)

Bank charges 60 30 17 13(fav)Advertisement 9 16 10 6(fav)

Audit Fees 0.42 0.84 1.72 0.88(adv)

Legal Exp 2.75 2.5 0.77 1.73(fav)

Conveyance charges 8 10 11.16 1.16(adv)

Books & Periodicals 4.5 3 2.12 0.88(fav)

Membership & seminarsfees etc.

6.75 75 7.92 67.08(fav)

Committee meetings &Entertainment exp

4 3.5 3.59 0.09(adv)

Hostel & Guest House 4.5 6.5 5.5 1(fav)Less Income -1.25 -1.25 -1.35 0.1(fav)

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Consultancy exp 5.5 1 0.33 0.67(fav)

Misc 52.5 117.5 70.58 47(fav)

258.17 386.59 225.84

161(fav)

SELLING EXP (C)

Selling Agency com 3 4 1 3(fav)Publicity Exp 7.5 7 10 3(adv)

Export Promotion Exp 7.5 2 0 2(fav)

Misc 25 5 7.83 2.83(adv)

43 18 18.83 1(adv)

CHARGED OFF, (D)

WRITTEN OFF&PRO

Mise 60 40 40.15 0.15(adv)

Total of A+B+C+D 442.1

7

500.34 361.82 138.52(fav)

REASONS FOR VARIANCES FOR THE YEAR 2007-2008

The performance in respect of both Vop and sales was lower than the targets and is mainly

because of the receipts of most orders at the fag end of the financial year and delays in

import of critical raw materials from Russia.

A. Raw materials: Due to continued efforts by the organization to overcome the

problems arises due to imposition of restrictions on supply of materials and as a

result procurement of this material at higher prices and increased utilization of

internally generated scrap has resulted cost of Raw material consumption.

B. Repairs and Maintenance: Because of the aging of the machinery and equipment,

repairs and maintenance jobs are increasing.

C. Consumables: By improving the life of the furnace lining and recondition of used

cast iron moulds the cost of consumables has come down over the revised

estimates.

D. Salaries and Wages: The expenditure on incentives bonus, VRS, PF has increased

in spite of these; there was nominal variance between actuals and RE due to

controls exercised on other expenses like LTC, Comp off etc from time to time.

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E. Administrative and Selling expenses: Even though security expenses were

increased after September 11th attacks, the reduction in administration expenses was

mainly due to less expenditure incurred on rent services hares, printing and

stationary, travel expenses, etc. There is a nominal increase in selling expenses as

compared to estimates due to increased publicity expenses.

F. Inventory: As most of the orders were received at the end of the financial year, the

organization was not able to execute the orders in time and WIP has increased over

estimates. The increase in finished goods inventory indicates that there is a delivery

of goods to the customers.

Even though the sales turnover was less than the estimate, the organization

exercised control over expense and consequently the cost of production was less

than the estimates and as a result the operating loss was less than the estimated.

G. G.R&D: The expenditure on R&D was less than the estimated expenditure

indicating that the organization has deferred has the activities to the required level.

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PARTICULARS BE RE Estimate for actual

output


vop

Sales 1300

0

12000 9152 2848(adv)

Value of production 12050

10700 8496 2204(adv)

Cost of production

Raw materials 4460 3665 (8496/10700)*36652910

2582 328(fav) 34.25

30.39

Consumbles 730 630 (8496/10700)*630 500 512 12(adv) 5.88 6.02

Power 732 600 (8496/10700)*600 476 622 146(adv) 5.67 7.32

Fuel 757 560 (8496/10700)*560 445 555 110(adv) 5.23 6.53

Reparirs & Maintanc 400 375 (8496/10700)*375 298 335 37(adv) 3.5 3.94

Off loading 715 850 (8496/10700)*850 675 763 88(adv) 7.94 8.98

Total variable cost 7794 6680 5304 5369 65(adv)

Saleries & Wages 3250 3309 3179 130(fav)

Other expenses

Factory Expenses 66 82 73 9(fav)

Addmin & Sellings 385 374 378 4(adv)

Depereciation 330 250 203 47(fav)

R&D 127 125 0 125(fav)

Amortisation 5 10 10 -

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Total fixed cost 4273 4175 3859 317(fav)

Total cost of prod 12067

10856 9228 1628(fav)

Operating profit -18 -156 -733 577(adv)Capacity utilization 78% 96% 55% 41(adv)

Sales quantity (tones) 2137 2616 1489 1127(adv)


(Rs. In Lakhs)



Consumables 650 600 533 67(fav)

Spares 425 300 278 22(fav)

Internally generated 750 800 1139 339(adv)

Work in progress 3184 3225 3492 267(adv)

Finished goods 10 50 256 206(adv)

Total inventory 6019 5875 6683 808(adv)

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DETAILS OF SALARIES AND BENEFITS (2008-2009)

(Rs. In Lakhs)

PARTICULARS BE RE ACTUALS VARIANCESalaries & Allowance 2181.23 2188.65 2139.04 49.61

Leave encashment 93.95 110.39 95.5 14.89

Comp Off 77 40 29.35 10.65

Incentive Bonus 40 90 59.41 30.59

Statutory Bonus 0 0 0.43 0.43

Stipend to Trainees 15 15 9.19 5.31

PF(Incl Insp) 223.38 217.73 216.54 0.19

Gratuity 123.41 100 106.37 6.37

VRS 103.85 109.78 11.87 2.09

Misc 8.2 7.15 3.6 3.552866.02 2878.7 2771.3 107.18

WELFARE

EXPENSES

Canteen Expenses 55 57 55.22 1.78

(Less Receipts)

Health Care 95 110 112.64 2.64

Family Welfare 6 6 6.09 0.09

Liveries 35 29 26.1 2.9

LTC 0 70 81.01 11.01

Transport 66 50 39.47 10.53Less Receipts)

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Conv Allowance 40 50 47.13 2.87

Children Educat Allowa 14 15 10.67

Staff Welfare 10 1 1.59 0.59

Int Subsidy on 28 20 14.69 5.311

House Loans

Township Expenses 22 19.5 14.32 5.18

Less Receipts)

Township Expenses 22 19.5 14.32 5.18

TOTAL WELFARE 403 457.5 434.11 24.48

GRAND TOTAL 3269.02 3336.2 3205.41 131.65



FACTORY EXP (A)Water 15 33 20.59 12.41(fav)Rates & Taxes 4 3.60 9.66 6.06 (adv)Insurance 31 25 32.15 7.15 (adv)Amortising Tools 1 0.50 0.4 0.10 (fav)Miscellaneous 15 20 9.96 10.04 (fav)

66 82.10 72.76 9.34 (fav)ADMN. EXP (D)

Rent & service charge 12 12 8.44 3.56 (fav)Postage Telephone & Telex 38 35 29.11 5.89 (fav)

Printing & Stationery 22 20 20.87 0.87 (adv)Travel Expenses 65 70 55.47 14.53 (fav)Bank charges 30 20 25.19 5.19 (adv)Advertisement 15 14 8.09 5.91 (fav)Audit Fees 0.84 0.77 0.91 0.14 (adv)Other Audit - 1.22 1.13 0.09 (fav)Legal Exp 2.50 1.50 1.67 0.17 (adv)Conveyance charges 12 14 12.34 1.66 (fav)Books & Periodicals 2.75 2.75 2.71 0.04 (fav)Membership & seminars fees etc. 8 17.50 8.91 8.59 (fav)Committee meetings & Entertainment exp 3.75 6 3.66 2.34 (fav)

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Hostel & Guest House 7 6 4.7 1.3 (fav)Less Income

Consultancy exp 1.50 1 5.69 4.69 (adv)Misc 76 63 63.98 0.98 (adv)

296.34 284.74 252.87 31.87 (fav)SELLING EXP (C)

Selling Agency com 5 3 3.79 0.79 (adv)Publicity Exp 8 15 11.31 3.69 (fav)Export Promotion Exp 5 2 0 2.00 (fav)Misc 7 10 16.34 6.34 (adv)

25 30 31.44 1.44 (adv)CHARGED OFF,(D)

WRITTEN OFF&PRO

Miscellaneous 65 60.09 94.77 34.68 (adv)

Total of A+B+C+D 452.34 456.93 451.84 5.09 (fav)

REASONS FOR VARIANCES THE YEAR 2008-2009

Value of production decreased in 2008-2009 by Rs. 22.04 crores as against Re 2007-2008

due to reduced sales realization of various products. The reasons for lesser sales is due to

lack of orders what ever executed also are of low value in nature of all the production

facilities.

Cost of Production Budget:

a) Raw material: As the VOP decreased raw material consumption also got

reduced. Raw materials on account for about 36.66% of VOP and efforts are

on to increase the scrap utilization to reduce the ratio of raw materials to

VOP.

b) Consumables: Consumption of consumables also reduced due to the

reduction in value of production that is reduction in production activities.

There is a slight increase in consumption of judicious usage of high value

consumables. However efforts are on to contain the consumption.

c) Power & Fuel: Power and fuel requirements are usually determined on the

basis of the level of operations in various shops on the various product mi.

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There is an increase in power cost due to upward revision of power charges

by APSEB. The increase in Fuel cost is mainly due to increase price of fuel in

International markets.

d) Repairs & Maintenance: However, there is no increase in this expenditure

because of the aging of the machinery and equipment, repairs and

maintenance jobs are increasing. The major portion of this expenditure

comprise of spares.

e) Off loading expenses: Usually off loading of work in resorted to reduce the

cost of production by getting the small works done outside at a cheaper rate

instead of doing internally. During the year the expenses were higher because

of drastic reduction in volume of off loading quantity.

f) Salaries and Wages: Reduction in factory expenses were increased by Rs.4

lakhs compared to Re 2008-2009 due to increase in consultancy, printing&

stationery expenses due to selling agency commission. .

g) Inventory: Increase in inventory by Rs.8.08 crores. As against RE 2008-2009

due to low value of production resulting in to lack of bulk orders.

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PARTICULARS BE RE Estimate for

Actual Output


vop

Sales 12000 12531 5135 3396(adv)

Value ofproduction

11332 10360 8495 2265(adv)

Cost of production

Raw materials 3665 2582 (8495/10760)*2582 2038

2558 519(adv) 23.99

30.11

Consumables 630 512 (8495/10760)*512404

511 107(adv) 4.75 6.01

Power 600 623 (8495/10760)*623492

719 227(adv) 5.79 8.46

Fuel 562 555 (8495/10760)*555438

517 78(adv) 5.15 6.08

Repairs &Maintains

370 335 (8495/10760)*335264

366 101(adv) 3.10 4.30

Off loading 849 763 (8495/10760)* 763602

1476 847(adv) 7.08 17.37

Total variable cost 6677 5370 4238 6147 1909(adv)

Salaries & Wages 3309 2352 2421 69(adv)

Other expenses 300 369 389 20(adv)

Factory Expenses - - - -

Admin & Sellings 372 360 378 18(adv)

Depreciation 254 203 130 73(fav)R&D 125 19 1 18(fav)

Amortization 10 10 21 11(adv)


Total fixed cost 4370 3329 3353 24(adv)

Total Cost of Prod 11047 8699 9500 801(adv)

Operating profit -78 -250 -193 57(adv)

Capacityutilization

70% 96% 72% 24%(adv)

Sales quantity

(tones)

2011 1975 1088 887(fav)

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(Rs. In Lakhs)

PARTPCULARS BE RE ACTUALS VARIANCE


Consumables 600 485 513 28(adv)

Spares 350 273 271 2(fav)

Internally generated 800 1137 1057 80(fav)

Work in progress 3184 3490 2848 642(fav)

Finished goods 10 255 11 244(fav)

Total inventory 5894 6546 5666 880(fav)


0

500

1000

1500

2000

2500

3000

3500

Inventory

BE RE ACTUAL

Year(2009-10)

Inventory Budget(2009-10)

Raw materials

Consumables

Spares

Internally generated

Work in progress

Finished goods

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FACTORY EXP (A)

Water 20.59 21 32 11 (adv)

Rates & Taxes 9.6 10 24 14 (adv)Insurance 32 32.15 33.08 0.93 (adv)

Amortisin

Documents

Budget and Budgetary Conrol